Is Currency Appreciation to Blame for China’s Slowdown?

Tuesday, October 20, 2015

Update Saturday twenty-four October two thousand fifteen

If China’s economy is highly dependent on exports, as many believe, keeping the value of its currency low is important for the country’s economic growth. A recent Economic Synopses essay by Economist Paulina Restrepo-Echavarria examines the relationship between China’s economic slowdown and its currency appreciation.

Is important remark that, insight over examined Chinos intentions , cheaper exports are more attractive.

After the Asian crisis in 1998-99, China fixed its currency to the U.S. dollar (USD). This remained the case until 2005, when China decided to gradually increase the value of the Yuan (CNY). As a result of this policy, within three years the CNY evaluated around 17 percent against the USD.

But then the U.S. sub-prime mortgage crisis led to a decline in world trade and exerted competitive pressure on Chinese exporters. Around August 2008, China reversed its policy and “re-pegged” its currency to the USD. In June 2010, China’s central bank announced that it would return to a more flexible exchange rate. Since then, the CNY has appreci­ated around 10 percent against the USD

She concluded: “At least this is the case when one thinks about the simplest direct channel through which a currency exchange rate can affect growth: A currency appreciation makes exports more expensive, exports shrink by a large amount; and if they constitute a large share of GDP, then GDP growth will suffer.”

If China’s economy is highly dependent on exports, as many believe, keeping the value of its currency low is important for the country’s economic growth. A recent Economic Synopses essay by Economist Paulina Restrepo-Echavarria examines the relationship between China’s economic slowdown and its currency appreciation.

Is important remark that, insight over examined Chinos intentions , cheaper exports are more attractive.

After the Asian crisis in 1998-99, China fixed its currency to the U.S. dollar (USD). This remained the case until 2005, when China decided to gradually increase the value of the Yuan (CNY). As a result of this policy, within three years the CNY evaluated around 17 percent against the USD.

But then the U.S. sub-prime mortgage crisis led to a decline in world trade and exerted competitive pressure on Chinese exporters. Around August 2008, China reversed its policy and “re-pegged” its currency to the USD. In June 2010, China’s central bank announced that it would return to a more flexible exchange rate. Since then, the CNY has appreci­ated around 10 percent against the USD

She concluded: “At least this is the case when one thinks about the simplest direct channel through which a currency exchange rate can affect growth: A currency appreciation makes exports more expensive, exports shrink by a large amount; and if they constitute a large share of GDP, then GDP growth will suffer.”